The real effects of the crash
Whilst the Georgians were pontificating on the themes of vanitas and folly, the economy was reviving. The South Sea Company was continuing its trading activities and its financial role for the state. This chapter covers the aftermath of the crisis. The King had called for an end to the debates and hunts for scapegoats. The directors were given back some of the assets confiscated after the crash. The company’s ships sailed on and the company took up whaling. The company did not stint on its preparations, but probably entered the trade at the wrong time. The famous Bubble Act legislation did not actually limit economic growth and development as has been thought. In comparison with Britain, the French system was more deeply scarred by the Mississippi Bubble. A halt was called to the type of financial experiments beloved of John Law. Many of the pieces of received wisdom about the crash are not true. For example, many people have believed that Robert Walpole foresaw the crash. The South Sea Bubble was a key event in the career of Robert Walpole. He had been politically sidelined until the crisis gave him the opportunity to show his abilities to the full. He had been lambasted as the ‘Screenmaster General’. Contemporaries believed, correctly, that he had covered up the links between the court and the company. He had good reason to do so, aside from furthering his own political ambitions. Walpole was aware that even when France was weak, a Jacobite uprising was always possible. There were many at home who believed that the male Stuarts were the rightful kings. A faltering economy might even bring more trouble if the Hanoverians were seen to be corrupt. Walpole was able to turn this apparent weakness to his advantage. He used the Jacobite threat to put a limit on any further political enquiry. Once the scapegoats had been punished, George I asked Parliament to concentrate on protecting the Protestant cause. Cleverly, Walpole had put an end to further investigations into the activities of the elite. The economy revived, partly because Walpole’s actions and rhetoric had restored some confidence. If people believe that something is being done, then that is half the battle. Once a frightened population start hoarding money and postponing economic decisions, then the economy will contract. To say that there will be a crisis is often a self-fulfilling prophecy. To appear to be doing things is essential. Walpole had less to do with the details of the rescue plan than
many people realise. He was the figurehead for the policies. However, he did have the wit to clarify the point that financial contracts should be honoured. Had he yielded to pressure to change these contracts, then this would have undermined the system of credit further. It would have introduced more uncertainty into the market and increased the number of court cases. Walpole was also aware of the importance of the financial system. Unlike Archibald Hutcheson, he did not think that the entire National Debt could be paid off in a year with more land tax. By adopting a laissez-faire attitude to the stock market, he allowed it to continue to function. Share prices did revive slightly after the crash, but this is not unusual. After panic selling has driven all the most nervous traders out, then others snap up the shares at bargain prices. Prices then rise slightly. The phenomenon has the modern name of a ‘dead cat bounce’. The reasoning behind this striking phrase is that even a dead cat will bounce if it falls from a great height. A recovery in the share price may have little to do with government intervention. The national debt had been successfully converted so there was no need to revert to other costly measures. The nation could now contract for new debt if necessary and it had managed its conversions without undermining its reputation. The debt burden had not been repudiated. Holders of government debt had voluntarily resigned their claims. It was true that the last waves of subscribers accepted worse terms than the earlier ones. It is not clear how many did so. There was a reorganisation of the distribution of wealth. We tend to hear about those who made great gains or losses, but it is not clear how typical these investors were. Financial market theory would predict that noise traders would make losses and leave the market. In the stark world of economic models, noise traders garner little sympathy. However, it is possible that money that would otherwise have ended up in the hands of a country squire was put to better use by a city trader. Archibald Hutcheson assumed that it was the right order of things that landed men held the nation’s wealth. Modern readers may think differently. As we do not know the magnitude of individual gains and losses, neither do we know the uses to which money was put. However, it is more likely that the informed traders in the market were those in trade and the uninformed were those who were not. An optimistic reading of this event was that money was removed from under the mattresses of the wealthy elite and transferred to those who had a better use for it. The social upheaval feared by Hutcheson and others did not occur. Jews, women, servants and the rest were still kept in their places. However, there was the possibility that some of them had been able to improve their lot. Jewish investors played a role in helping the economy, despite what antiSemitic propaganda had to say about them. Ann Carlos and Larry Neal have studied the Bank of England archives in some detail.1 Their work with Maguire considered the activities of Jewish traders (Carlos et al. 2008). They argued that without purchases of Bank stock by the Jewish community, the Bank’s share price would have fallen even further. They may potentially have snapped up a bargain, but they were also taking a risk. There was always the possibility that
the Bank would fail and the Jews’ money would be needed for other purposes. Taking this evidence one step further, it is true that Jews faced other costs that many other traders did not. In times of crisis, Jews might expect to be blamed by the Gentile majority. In the worst case, they might be expelled or be subject to attacks and punishments. (For example, the Jewish community had been expelled from Vienna in 1670.2) Ready money and portable assets such as jewellery would be more important. In putting their faith in Bank stock, they were making a real commitment. Their detractors, like Hutcheson, were unlikely to appreciate the gesture. People with small sums to invest might still have made money if they sold shares at the right time. Their total gains would be proportional to the amount originally invested. Therefore it is not surprising that their successes have gone unnoticed. Investors on a larger scale, such as Thomas Guy, were more obvious. Guy’s investments have already been discussed in Chapter 6, but he was a newmoney man. His background was in trade, not the landed aristocracy. Such men could use their new-found wealth to buy up landed estates and even to get into Parliament. Archibald Hutcheson feared that the scions of great titled families were heavy losers. He presented no evidence for this claim, but in one case he was right. The Duke of Portland got into severe financial difficulties and was engaged in numerous lawsuits (see Shea 2009). The Duke tried to have the details of the transactions altered ex post. This is exactly the method that Hutcheson favoured, and which was not unknown in legal practice at the time. The courts might alter mortgage contracts to protect the interest of the landed elite.3 The courts acted to preserve landed estates even from their owners and heirs, and blamed others from taking advantage. The rhetoric used against successful brokers and investors was in a similar vein. If they succeeded in making a fortune from bargains with landed gentlemen, then the bargains should be null and void. The monied men were vilified for even attempting to make large gains in this way, as was the tradition of the law courts. The assumption was that no landed gentleman would truly wish to dispose of his property. Therefore, if he signed any bargain to that effect, he must have been taken advantage of. This type of legal protection can explain why the landed elite was so entrenched. They were able to change the rules if necessary. No notion of caveat emptor might be employed. Likewise, there seemed to be no understanding that a gentleman should pay his debts. Walpole’s decision to let the financial contracts stand was not as easy as it might first appear.